Special news – the Turner report

Government response

The appearance of the report coincided with apparent tensions within government as to how to respond to the issues raised. It appeared that the Treasury wanted to attack the proposals on affordability grounds, based in turn on the assumption that it was not necessarily committed to raising the level of means-tested pensions credit in line with earnings. 10 Downing Street was apparently more sympathetic to the broad thrust of the proposals and to the need for a fairly stable framework, although it too appeared to reserve its position on affordability.

It is envisaged that government will respond in general terms early in 2006 but it remains to be seen how long the timetable will be for any implementing action.

Other responses

The actuarial profession responded rather grudgingly to Turner’s analysis, suggesting that his envisaged change in the retirement age for state pension purposes to 67 or 68 failed to take improving longevity sufficiently into account. Faculty President Harvie Brown criticised a ‘lack of new thinking’ although it was not clear what he would have expected in this regard.

The Association of Consulting Actuaries was critical of the lack of support for employer provision and not at all a fan of the ‘Britsave’ proposal. It was reluctant to accept Lord Turner’s suggestion that defined benefit (DB) schemes were an anachronism, although the Turner analysis was quickly supported by Rentokil’s decision to close its DB scheme to active members.

Attitudes on the part of financial services providers seemed to vary, with some insurers with relatively well-developed administration were hostile to Britsave, while fund managers seemed disposed to welcome the new scheme or at least the probable opportunity to manage some extra assets.

Business attitudes also seemed likely to be diverse, with larger firms with occupational arrangements broadly welcoming the report, while smaller firms focused on the impact on their costs of the 3% minimum employer contribution to Britsave. Some were concerned that firms with existing occupational arrangements might not be unhappy to see the cheaper Britsave substituted for these.

Meanwhile the trade unions were inclined to cherry-pick from the report – welcoming the elimination of means-testing in relation to the pensions credit while expressing themselves concerned about the implications for poorer workers of any increase in state retirement age. There was perhaps a sense that trade unions’ real concern is protecting the generous retirement provisions of public sector schemes – an issue beyond the scope of Turner.

Comment

The Turner report is a thorough analysis of a most difficult subject which at root reflects tension between generations warring for national resources. These tensions are not at all unique to the UK, and no country has achieved a solution which obviously should be emulated.

It will, however, require exceptional and sustained political leadership to implement a stable framework which is appealing in concept but with details which in different ways grate with different stakeholders. Indeed, given future economic and demographic uncertainty and the short political cycle, it can be understood why most democracies fail to achieve stability in pensions frameworks. More on this in next month’s issue!

Key recommendations

The establishment of a National Pensions Saving Scheme (colloquially ‘Britsave’) into which all employees without good existing provision would be automatically enrolled but with the right to opt out. Minimum default employee contribution rates would be 5% of gross pay above £5,000, of which 1% is effectively paid by tax relief: employers would be required to make matching contributions of 3%. Both employers and employees would be able to make additional voluntary contributions, and the self-employed would be able to join on a voluntary basis. The design of the scheme should aim for low costs, eg 0.3% per year, thus boosting the value of pension saving by up to 30%. The scheme aims to encourage people to save for a pension and to enable them to do so at low cost.

Reforms to the state system to ensure a sound foundation on which pension saving can build. These involve a gradual move towards a more generous state pension with the state pension age also increasing over the long term. In essence a higher pension at a later age.

Measures to improve the position of people with interrupted work records and caring responsibilities, who are disadvantaged by the existing contributory system.

Measures to facilitate later working and flexible retirement for those who want it.